Shaun Harris
The Divorce Amendment Act, in operation since August 1989, was an attempt to provide for the more equitable distribution of retirement assets between the member of a retirement fund and the non-member spouse at the time of divorce.
In practice, though, the settlement is often not equitable, and in some cases it may even be preferable for the non-member to not take the benefit offered by the courts and negotiate instead for a more flexible benefit.
The fund member could be male or female, but most often the Act applies to a husband divorcing his wife. And the woman, often a housewife, is particularly vulnerable as she may not have any other retirement benefits in place.
Tiny Carroll, senior legal analyst with Old Mutual Legal Services, says the Act enables a court granting an order of divorce to award a portion of a member spouse’s interest in a pension, provident or retirement annuity fund to a non-member spouse. “Very often the non- member spouse, and for the sake of ease I’ll assume it is a woman, will mistakenly believe that her financial security at retirement has been taken care of because of this award in her favour.”
But it’s often not the case, he says, and being aware of some of the flaws inherent in the Act will enable the woman, and particularly her financial adviser, to make the best financial decision at what is a critical stage of life.
Carroll says in broad terms the Act, applicable to all marriages except out-of- community marriages entered into after November 1 1984, where the accrual system has been specifically excluded, makes provision for three steps.
First is the determination of pension interest, different between pension and provident funds on the one hand and retirement annuities on the other. “In the case of a member of a pension or provident fund, pension interest is the amount which the member would have been entitled to had he resigned on the date of divorce.” For a retirement annuity fund member interest is the contributions made to the fund up to the date of divorce, plus simple interest, currently calculated at a rate of 15,5%.
The second step is the court, granting an order of divorce, taking into account these definitions of pension interest as part of the parties’ divisible assets, and awarding a portion of the member’s interest to the non- member spouse.
Finally, where such an award has been made, the records of the fund need to be endorsed to reflect that a portion of the member’s interest has been set aside for the non- member.
That all sounds well and good, but Carroll warns of a number of possible pitfalls.
First is that the definition of “member interest” limits the amount available for distribution to the member’s withdrawal benefit. “Very often pension and provident funds provide for a limited resignation withdrawal benefit. The non-member spouse will only become entitled to a portion of this limited benefit, which is often only a fraction of the true fund value,” he says.
Carroll’s advice is for the woman to satisfy herself as to the actual rand value of the award being made, to avoid disappointment when the benefit is eventually paid out.
A further danger is that the amount awarded to the non-member ex-spouse will only become payable to her once the member becomes entitled to benefits in terms of the fund, typically at retirement date or when he exits the fund.
“As a result,” says Carroll, “a member can frustrate an ex-spouse’s claim for years by continually postponing his retirement date. The implications could be financially devastating for a woman who may be reliant on this award as an important source of income.” But the biggest problem with the Act is that once an award has been made there is no provision for the addition of interest or growth on this amount. “So, for example, where an amount of R1 000 has been awarded to the non-member, this amount will remain R1 000 in nominal terms even if it is paid out in 20 or 30 years’ time. When inflation is taken into account over a long term, even a substantial award made now will be worth very little in real terms when it is eventually paid out,” he says.
While the Act was introduced to try and bring about a more equitable distribution of assets on divorce, Carroll says that due to the narrow scope of the provisions it may often be to the woman’s advantage to forgo a claim in terms of the Act in exchange for some other benefit of equal value.
“In particular, taking cession of an endowment policy or transfer of unit trusts or accepting a cash award which can be invested in either of these mediums, will prove to be a far better option. This will at least provide the non-member spouse with a growth asset.”
In addition, says Carroll, the woman will have the option of making additional contributions and the independence of selecting her own retirement date.